In recent months, American businesses have focused their
attention on China, which is becoming increasingly competitive with
U.S. firms. Several U.S. business associations are filing
anti-China trade complaints in Washington, charging that Beijing
keeps its currency pegged to the dollar at a low rate to export
more cheaply.

But even as they focus on Beijing, Americans appear to be
ignoring the fact that Japan, the world's second-largest
economy, is recovering from a decade of economic malaise. Lately,
Japan's economy has posted impressive figures, and a recent
Bank of Japan survey showed business confidence rose in Japan last
August and September, the first time confidence has gone up in more
than three years. The reason: Japan's economy grew by nearly 4
percent in the second quarter of 2003, while Japanese exports grew
by nearly 10 percent year-on-year in September.

Japan's nascent revival can be attributed to several
factors. First, Prime Minister Junichiro Koizumi and his cabinet
have begun to push sclerotic Japanese companies to reform and
become globally competitive again; the Koizumi government has
launched programs to downsize and reform businesses. "Koizumi
has changed the mood of the country toward more reform," says
William Breer, Japan chair at the Center for Strategic and
International Studies, a Washington, DC, think tank. Responding to
Koizumi, as well as to pressure from China and other developing
nations, many Japanese companies have begun downsizing and
outsourcing in cheaper locations. With the money they've saved,
businesses are able to invest in R&D, producing better goods
more cheaply. Consequently, Japanese consumer spending is
recovering: Spending by Japanese workers rose nearly 0.5 percent
between June 2002 and June 2003.

Japan's recovery holds promise for American business. Strong
economic growth is pushing the Japanese yen up-Merrill Lynch
estimates it will rise by 12 percent against the dollar between
fall 2003 and summer 2004. A stronger yen would be good for
American manufacturers, particularly small companies that make
computer and electronics parts, whose exports would be cheaper by
comparison with Japan, says Toshio Nishi, a research fellow at the
Hoover Institution on War, Revolution, and Peace at Stanford
University.

What's more, Nishi says, if Japan recovers, "the whole
world will benefit." Japanese consumers will increase their
consumption of American agricultural goods-American soybeans
go primarily to Japan and China, for example-while Japanese
companies, flush enough to spend more on capital equipment, will
buy machinery from the United States.

Still, many experts are not convinced the island nation will
sustain its recovery. Japan has entered short-term recoveries
before in the decade since its economic bubble burst but has never
maintained its growth. And the country continues to face a mountain
of public debt, persistent deflation and, despite Koizumi, a
political system that rarely changes. "I've heard for the
past 12 years the same story about Japan's economy
recovering," says Nishi. "I remain very
skeptical."